Dunkin’ Brands: The On-the-Go Cup of Joe

Success in the world of low-cost coffee, even in a sea of frappuccinos

Dunkin’ Brands, the franchisor of both Dunkin’ Donuts and Baskin-Robbins, has developed a highly effective operating model, well aligned with the Company’s business model, which, upon successfully shifting from a donut-first to a coffee-first model, has increased the Company’s ability to execute its low-cost, consistent quality, service model within the quick service restaurant (QSR) market. I believe Dunkin’ Brands is highly effective in driving alignment of operating and business models given the Company’s consistent focus on low costs, high-quality site selection process, franchisee-owned location network, standardization of product offerings and quality and continued focus on marketing, brand management and menu innovation.

Dunkin’ Brands is a leading QSR franchisor that has built a large network of Dunkin’ Donuts and Baskin-Robbins locations which serve coffee, baked goods and other food items, including ice cream. Dunkin’ Brands generates revenues primarily through royalties from franchisees (owners of individual retail locations), rental income (also from franchisees), sales of goods within Company-owned stores and elsewhere and other licensing fees. Franchisee royalties represent the predominant portion of revenue, generated through gross sales at existing stores as well as royalties related to new store openings. Sales of ice cream (Baskin-Robbins) and rental income represent the majority of remaining revenue.

Dunkin’ Brands has, until recently, primarily focused its franchisee network within the Northeast, aiming towards more “traditional” coffee customers, who often require less diverse menu options, and who appreciate the brand for its ability to offer a quality product quickly, efficiently and at a reasonable price. Dunkin’ Brands has successfully maintained a strong franchise network that has been adept in maintaining strong growth, profitability and brand recognition while significantly shifting its business model from food towards beverage. Without direct control over retail locations, Dunkin’ Brands has continued to focus on franchisee coaching and support, marketing and advertising and consumer feedback in order to maintain its overall business and has been quite successful in maintaining this quality without the distraction of day-to-day operations.

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As a franchisor, Dunkin’ Brands operates primarily as an overseer of stores’ performance, with significant oversight of site selection, training and compliance, all in efforts to maintain consistency of service and product delivery across the network. Through requirements for site approval from Dunkin’ Brands, the Company ensures that franchisees locate in areas with high population density, quality traffic patterns and target demographics that align with the overall brand message and intended audience. The Company also helps franchisees to select locations that will allow for profitable growth of their own businesses in addition to profiting Dunkin’ Brands.

Additionally, the Company maintains tight control over its supply chain, ensuring consistency, quality and availability of coffee, food and other products, while maintaining minimal inventory. Through concentration in the Northeast, Dunkin’ Brands was able to develop and successfully implement this low inventory distribution model. In addition, Dunkin’ Brands’ focus on customers with less particular requirements around coffee bean type and source location, has allowed the company to maintain lower overall product costs.

With regards to the shift towards a beverage-focused strategy, the Company responded to growing health consciousness and rising coffee consumption by focusing on providing the best value proposition to their customers, moving from donut-first to coffee-first. Dunkin’ Brands has been extremely successful in selling donuts, breakfast sandwiches, and other items, including Baskin-Robbins ice cream, through to customers drawn in by the coffee and other beverage offerings. Whereas competitors, such as Krispy Kreme, have focused on a donut-first strategy, and struggled, Dunkin’ Brands has responded well to consumer shifts and has developed a strong method for acquiring customers and using beverage sales to drive food sales.

The Company, knowledgeable that customers are focused on quality, cost and timing, has trained employees to focus on fast, consistent service and includes drive-in concepts across many of its locations. Many locations are in or near gas stations, supermarkets, malls and airport food courts, with a focus on the on-the-go beverage customer.

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Dunkin’ Brands’ operating model, which focuses on site selection, franchisee training, supply chain management, marketing and brand management while ensuring low-cost, quality products and service to a targeted market of coffee drinkers, aligns very well with the Company’s goal of increasing franchisee revenues through increased gross sales as well as new store openings (gross sales royalties dwarf new store royalties). Dunkin’ Brands’ has successfully built its site selection process, whereby the Company is able to assist entrepreneurs in decisions around the best potential location for new openings, thereby creating profits for both the franchisees and the Company. Additionally, Dunkin’ Donuts’ transition towards the beverage business has been incorporated in the Company’s operating model, with increased brewing equipment, commitment to coffee turnover and a staffing model that emphasizes quick delivery of customer orders in order to maximize customer turnover. This operational emphasis maintains higher customer satisfaction, retention and overall volume, revenue and profit.

The franchisor model allows Dunkin’ Brands to operate a significantly more profitable business model than peers who focus on direct management of stores, given lower overall margins within direct store management and beverage / food sales. Separation of core competencies between marketing, brand management, strategy, distribution and product innovation (Dunkin’ Brands) and food preparation and customer service (franchisees) allows both parties to execute at greater levels of efficiency. Additionally, Dunkin’ Brands’ capital-light investment model allows for quick, more flexible shifts in strategy as initial investment costs are generally borne by franchisees. In a highly competitive market, this is a great strength that will allow Dunkin’ Brands to capture significant value.

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Overall, Dunkin’ Brands has been highly successfully in designing an operating strategy that allows for the management of a network of stores dedicated to fast delivery of low-cost beverages, cross-sales of food items and consistent product quality across a well-targeted network of retail points of distribution serving the growing needs of consumers across the United States and abroad.

 

Sources:

  1. http://www.fastcocreate.com/3034572/coffee-week/dunkin-donuts-and-starbucks-a-tale-of-two-coffee-marketing-giants
  2. http://business.time.com/2013/06/26/dont-call-dunkin-donuts-a-donut-company/
  3. http://www.forbes.com/sites/panosmourdoukoutas/2013/11/05/dunkin-brands-panera-bread-and-starbucks-three-winning-business-models/
  4. http://www.sec.gov/Archives/edgar/data/1357204/000135720415000015/dnkn-20141227x10k.htm

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3 thoughts on “Dunkin’ Brands: The On-the-Go Cup of Joe

  1. Definitely interesting to think through the comparison of Dunkin Donuts to the often discussed Starbucks, and you’ve done a nice job highlighting the way in which the franchise model enables DD to align its models. I, too, am curious about product proliferation, as my impression has always been of DD as a simple and cost-effective option for coffee and/or donuts, as Adam discussed above.

    On a different note, I wonder how brand loyalty plays into this equation. You speak to the importance of training and customer service providing a consistent quality for the consumer, but I was struck how loyal the DD customers were when I first moved to Boston. It is a point of pride in New England that DD feels like a “local” brand. For example, it was well known at my office that during one of the blizzards last year, Dunkin was the only place you could count on being open. There is something about that very simplicity, consistent service, and low cost that results in incredibly loyal customers as just another piece of evidence that the operating model aligns to the business model.

  2. Daniel,

    Great post indeed! I am impressed by Dunkin Donuts’ nimble approach to its business strategy by placing responsibility and ownership of its stores in the hands of the franchisees. I like how it has kept its operations to be as asset light as possible through its franchisee model. I realize that corporate provides extensive trainings to its stores and oversees compliance with its standards for product and service integrity, however, I wonder if it has been able to ensure similar levels of performance across the stores given that no two management styles are alike. Does Dunkin Donuts have a very regimented approach to its franchisee owner selection? Also, how does it ensure that the immediate management that is responsible for the day-to-day operations and meeting of targets set by corporate actually deliver on these various metrics of performance? On another note, it is good to know that even a low-cost, high quality provider puts great emphasis on product innovation and marketing efforts to develop brand loyalty and increased sales.

  3. Definitely agree with Dan that site selection has been crucial to DD’s success. DD does not have a strong international presence yet, but they offer a cleaner in-store experience abroad. This makes sense, because most international customers are still not on the QSR boat, and they view DD more as a direct competitor to Starbucks. As DD explores new markets, how should it balance product proliferation with the need to develop local brand loyalty? Should it only go to places where coffee is the drink-of-choice, or should it offer whatever morning beverage people prefer? KFC as a branded franchise has done REALLY well in Asia, primarily by adapting its menu to local tastes. I am unsure whether DD has grand plans for international growth, but if they do, they should learn from KFC’s success in China.

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